Annual Report 2017 - Federal Audit Oversight Authority FAOA
40 Pension scheme audits | FAOA 2017 Pension scheme audits Heightened public interest Over four million people in Switzerland pay monthly salary contributions to one of around 1,700 pension schemes to insure themselves against old age, death and invalidity risks 59 . Over a million people draw pensions, totalling around CHF 27 billion annually. Pension schemes currently manage national wealth of more than CHF 900 billion. Auditors play a central role in the oversight system over these enormous sums. There is no doubt that the audit of pension schemes is of great public interest (see also FSC Ruling No. 2C_860/2015 of 14 March 2016, E. 5.3). As part of the financial audit the auditor ensures that financial reporting is in line with relevant standards. This gives various stakeholder groups (insureds, trustees and oversight authorities) a reliable insight into the financial situation of the pension scheme and, at a time of scarce investment opportunities and diminishing yields, creates a reliable basis for making far-reaching decisions. The auditor furthermore fulfils a whole range of additional important audit duties comparable to those relating to the regulatory audit of financial institutions (most particularly banks and insurers). As in the financial market, the state oversight of pension schemes is delegated to the auditor to a certain extent. However, this delegation requires commensurately high audit quality. Unlike financial market auditors, pension scheme auditors are not subject to on-going oversight. The only exception is the audit of investment foundations, for which a state-regulated audit firm licence is required. The FAOA can therefore only inspect the quality of pension scheme audit services in suspect cases and, in its licensing authority role, when assessing whether individuals can guarantee proper audit services. Duty of care violations Notwithstanding the above, serious violations of the appropriate duty of care are often found when assessing the guarantee of proper audit services. In the reporting year the FAOA was concerned with the following cases in particular: – In the audit of a pension scheme the auditor violated its duty of care very seriously by not auditing the classification, risk strategy and valuation of invested assets sufficiently. Obvious concentrations of risk were not recognised. In addition, the auditor was unable to reach a conclusion as to whether investments were correctly valued. The auditor also failed to assess the loyalty and competence of the pension fund administrators and audit the internal control system adequately. Based on these duty of care violations, the FAOA withdrew the licence of an individual for a period of five years. – In a further case, the FAOA assessed the guarantee of proper audit services with respect to an individual who had initiated unlawful payments to himself from three pension schemes. The individual concerned gave up his licence during the course of the investigations. – On 28 December 2016 the FSC partly accepted an appeal by the Swiss National Guarantee Fund against a decision of the Social Insurance Court of Canton Zurich over the duty of trustees of a collective BVG foundation and sent the case back for re-evaluation in the sense of re-deliberation (FSC Ruling 143 V 19). Due to the lack of a causal link, it negated auditor responsibility for the alleged damages. In terms of violating duty of care, however, it is to be noted that the auditor was not critical of the risk strategy when auditing compliance with investment regulations and that the brother of the president of the board of trustees had been the auditor-in-charge. As the matter related to business year 2001, over 15 years ago, and despite possible duty of care violations, the FAOA did not find evidence that proper audit services were not guaranteed. The foundation in question had offered threeyear contracts with a guaranteed interest rate of 5% on retirement assets. After the coverage ratio fell from 104.7% to below 82% in 2001 the trustees decided on a restructuring plan that, based on the promised yield of 15%, foresaw the transfer of the share portfolio (25% of invested assets) administration to an external trader with unlimited freedom to act. In 2002 the coverage ratio fell further to 71%, at which the Federal Department of Social Security ordered the liquidation of the scheme and the BVG Security Fund was forced to inject CHF 49.9 million. – On 30 March 2017 the Commercial Criminal Court of Canton Berne sentenced both the former manager of the Carbagas pension scheme and a building contractor to four year prison terms for commercial fraud. In 2007 – 2008 the pension scheme had bought 15 apartment blocks from the building contractor’s firm for a total of CHF 42 million. However, according to a later valuation the market value of the properties had only been CHF 31 million. The court considered it proven that the pension scheme had lost around CHF 5.6 million and that the manager had received commission payments of CHF 3.1 million in return for the inflated prices. The ruling was referred to the Supreme Court of Canton Berne (sources: St. Galler Tagblatt, 29 March 2017; Der Bund, 30 March 2017). The FAOA is following the case. – Five other cases were pending at the end of the reporting year. The FAOA is following developments related to these matters closely. 59 To this and the following: Federal Statistical Office FSO, Die berufliche Vorsorge in der Schweiz, Pensionskassenstatistik 2015.
Pension scheme audits | FAOA 2017 41 Need for legislative action It is obvious that delegating BVG oversight authorities must have some guarantee that the quality of the auditor’s work is of the necessary standard. For the FAOA the question therefore arises as to whether the legal requirements toward pension scheme auditors and auditors-in-charge are sufficiently high. The question also arises whether the current lack of licensing and oversight requirements is foreign to the system: While a PIE auditor within the scope of the special licence framework (particularly as regards insurers, who are certainly comparable to pension schemes) must meet additional practical experience and training requirements and be under oversight, pension scheme auditors basically require no specific experience. There are no periodic inspections of audit quality, as there are for other PIE auditors. As noted, due the lack of oversight authority, the FAOA can only act upon receipt of a plausible third party notification of irregularities. In most cases it is unfortunately then too late and the harm has already been done. Only independent oversight, as already practiced by the FAOA with respect to the auditors of PIE, can improve audit quality sustainably. Having regard to the expert report Ochsner/Suter on the need for legislative action with respect to audit law, dated 20 July 2017 (see «Regulatory developments, Current projects» above), on 8 November 2017 the Federal Council instructed the FDJP to perform an in-depth analysis. It should hereby be clarified whether the licensing and oversight of pension scheme auditors should be the responsibility of the FAOA or whether a solution similar to that in the AHV area should be sought. Should the need for legislative action be confirmed this could be included in any future amendment of audit or audit oversight law (source: Media release of the Federal Council of 9 November 2017). It is true that the OPSC issued directive W-03/2016 «Qualitätssicherung in der Revision nach BVG». Under this, from calendar year 2019, the auditor-in-charge of a pension scheme must evidence an annual total of at least 50 billable audit hours in this audit area and four hours of technical training. Even though the FAOA generally welcomes the direction of this directive, it believes that these requirements should be set at the legislative level. Furthermore, the FAOA believes it appropriate for it itself to be responsible for all licences and special licences in the audit industry (see strategic goal no.4 for the period 2016–2019). The bundling of financial and regulatory audit oversight has already demonstrated this. Costs can be saved by both audit firms and government bodies.